June 11, 2019

National Anti-Profiteering Authority rules on passing on benefits of lower GST rate to home buyers

1. Introduction

The NATIONAL ANTI-PROFITEERING AUTHORITY ruled that profiteering should be determined at the point in time and not at the completion of the project. As the developer had availed ITC during the project tenure, the developer was liable to pass on the benefits of lower GST rate to home buyers by way of commensurate price reduction. The NATIONAL ANTI-PROFITEERING AUTHORITY agreed with the findings of the DGAP and directed the developer to refund the net benefit of ITC by way of price reduction and excess GST collected from the flat buyers, along with interest @ 18% per annum.

Salarpuria Real Estate Private Limited (‘Developer’) was executing “East Crest” residential project at Bengaluru. Upon receipt of a complaint on alleged anti-profiteering, the DGAP investigated the matter. The developer agreed to profiteering, but informed that the benefits of lower GST to home buyers as price reduction could not be completed till the completion of the project and hence could not be passed on immediately to the flat buyers.

2. Facts

The developer was a real estate property development and infrastructure development company and was executing project “East Crest” situated at Bengaluru.
One of the Buyer of the flats lodged a complaint with the Standing Committee on Anti-profiteering under Rule 128 of the CGST Rules, 2017.
The complaint on profiteering by Developer consisted of two issues:
- Developer had charged 12% GST on 2/3rd of the agreement value and a further 12% GST on the additional charges which was not subject to Service Tax in the pre-GST era
- Developer did not pass on benefits of lower GST to home buyers by way of commensurate reduction in price of the flat in the GST-era.

3. Examination by DGAP

The Standing Committee on Anti-profiteering gave a reference to the DGAP to investigate and submit a report
The DGAP directed the developer to respond whether or nor ITC had been passed on to flat buyers by way of commensurate reduction in price

4. Submissions of the Developer before DGAP

Nature of project: The developer agreed that the project “East Crest” was not an Affordable Housing Scheme and was a residential project attracting normal GST @ 12%.
Share of project: The project consisted of 667 apartments in 11 blocks, out of which 467 units belonged to the developer and the rest to the land owner. Out of 467 units, 241 units were sold upto 30 June 2017
GST benefit to be ascertained: As the estimated time of completion of the entire project was March 2019, the developer could not ascertain the exact impact of GST and the benefit accruing therefrom, which could be passed on to the customers.
Challenges due to GST: The developer contended that introduction of GST had thrown open several challenges and uncertainties and the actual benefit on account of ITC could not have been ascertained immediately, pending negotiations on price reduction to be passed on due to ITC by the contractors, subcontractors and vendors.
GST impact: Prices of inputs and input services, increase/ decrease in ITC in the GST-era, negotiations with the vendors, eligibility to avail ITC, restrictions and blocked ITC in terms of Sections 16 and 17 of the CGST Act, relevant rules and other uncertainties due to interpretational nuances etc. were to be considered before ascertaining the impact of GST.
Ascertainment of GST benefit possible only on conclusion of project: As the entire project would take a several months to complete, the impact of GST could be ascertained only upon completion or conclusion of the project. Reaching any conclusion on ITC benefit to be passed on to buyers, based on assumptions and surmises would be premature.
Suo moto communication sent to flat buyers: The developer had also sent suo moto communications to customers that any benefit to be passed down on account of ITC was under discussion and would be updated soon.
ITC on unsold flats to be reversed: Corresponding ITC in respect of any unsold units would have to be reversed once the Occupancy Certificate was obtained. This would have an impact on the price paid by flat buyers.
Works outsourced to sub-contractors: Substantial portion (~ 80%) of construction activities were outsourced to sub-contractors and ITC was being availed by the sub-contractors. The developer was only procuring construction materials like steel, transformers, chillers and diesel generator units etc.
Willing to provide an undertaking to every flat buyer: The developer was willing to give an undertaking to each and every individual customer that adequate steps would be taken to pass on any benefit of ITC by way of reduction in price, at the project completion stage.

5. Observations of DGAP

Developer agreed to profiteering: The developer had agreed that there had been profiteering in the GST-era and gave a commitment that the accurate quantum of ITC would be finally determined and the benefit passed on to the flat buyers at the time of possession.
Point of time: As as per Rule 129 (6) of the Central Goods and Services Tax Rules, 2017 (‘CGST Rules’) any profiteering has to be established at such point of time and not at the completion of the project. Accordingly, ITC available to the Respondent and taxable amount received in the pre-GST era should be considered to determine the profiteered amount.
ITC reversal on constructed and unsold flats: ITC to be reversed in terms of respect of any unsold units has to be reversed upon receipt of completion certificate is in line with Para 5 of Schedule-Ill of the CGST Act.
ITC reversal on under construction unsold flats: ITC pertaining to unsold units under construction was provisional and needs to be reversed in terms of Section 17(2) and Section 17(3) of the CGST Act. Hence, ITC pertaining to the unsold units was outside the scope of the investigation. The developer was required to recalibrate the selling price of such units to be sold to prospective buyers by considering net benefit of additional ITC available in the GST-era.
Argument of sub-contracting not acceptable: The argument of developer that substantial works were outsourced was not acceptable as the entire amount was available as ITC and the subcontractors were also eligible for additional ITC, hitherto not available earlier.
Quantum of benefit to be passed on to flat buyers: Based on the data analysed, additional ITC of 1.45% of the taxable turnover was available to the developer, which should have been passed on to the flat buyers.
Contravention of GST law: The developer was in contravention of Section 171 of the CGST Act on two counts:
- Not reducing the pre-GST base price by 1.45% on account of additional ITC available
- Charging GST at 12% on the pre-GST base price

6. Submissions of the Developer before NATIONAL ANTI-PROFITEERING AUTHORITY

ITC availed not final: The ITC availed was subject to restrictions/ disallowance/ reversals and the final amounts could not be completed as the project was under execution
Mens rea: There was no attempt to make profit by not passing on the benefit of ITC.
Credit notes issued: Credit notes were issued to all customers making payments in the GST-era.
Industry practice: The sale price of residential flats was determined based on different parameters like surrounding developments, standard of life of that area, facilities such as hospitals, schools, public transport, accessibility, and pricing by competitors etc. As a business practice in real estate industry, the developer always aims to achieve an overall betterment in prices of flats sold over a period of 4 to 5 years.
Sale price of flats not dependent on cost: Therefore, cost of constructing a flat was wholly irrelevant in the pricing mechanism as cost had no role to play. Hence, the provisions relating to profiteering on passing on the benefit of ITC should not be considered.
Quantification for profiteering should be project span vis-à-vis part period: Sale of residential flats after obtaining the occupancy certificate would not be liable for GST and would result in reversal of ITC at the end of the project, as the project spanned over 3 to 4 years. Hence, the comparison of the ITC with output tax should be for the entire project covering the entire life span and not a part of the project period.
Pre-GST tax impact: In the pre-GST era, the developer was registered under the composition scheme under the Karnataka VAT Act and was not eligible for any ITC. In case of Service Tax, the developer paid it on 40% of the construction value and had the eligible ITC.
Post-GST tax benefits: With the introduction of GST, the only benefit accrued was impact of erstwhile Central Sales Tax CST @ 2% and Central Excise Duty paid on inputs.

7. Ruling of the NATIONAL ANTI-PROFITEERING AUTHORITY

Developer had benefitted for profiteering: Based on the data analysed, The developer has an ITC benefit of only 3.06% in the pre-GST era, as compared to an ITC benefit of 4.51% in the post-GST era, resulting in a net ITC benefit of 1.45% of the taxable turnover.
Benefit to be passed on to flat buyers: This amount of profiteering is required to be passed on to all the home buyers:
- Who had booked flats in the pre-GST era, but made payments during the GST-era.
- Who have booked flats in the GST-era and made payments before issuance of the occupancy certificate.
Amount to be refunded along with interest: The amount of profiteering in terms of Rule 133 (1) of the CGST Rules along with the amount of GST on additional amount collected shall be refunded along with interest of 18% p.a.
Benefit to be passed on to all remining buyers: The benefit accrued was computed only on the 51 units sold out of a total of 263 units, however, the same is required to be passed onto the remaining 50 buyers, who are not a party to this Ruling.

Advisiory under GST

DISCLAIMER: The views expressed are strictly of the author and VJM & Associates LLP. The contents of this article are solely for informational purpose. It does not constitute professional advice or recommendation of firm. Neither the author nor firm and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any information in this article nor for any actions taken in reliance thereon.

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